The deal concerns the Foreign Account Tax Compliance Act, known as Fatca, which became law as part of a 2010 jobs bill. The law requires foreign institutions to start reporting detailed information about foreign account holders to the Internal Revenue Service (IRS).
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Fatca originally required overseas financial institutions to provide information directly to the IRS, potentially in breach of their home countries’ privacy laws. Those institutions that don’t comply face a 30% tax penalty under the statute.
But the law caused uproar among overseas financial institutions which feared surge in compliance cost and opined that the law has set unrealistic implementation criteria and deadline to comply within 2017.
The new agreement will allow the banks of these five European nations to submit information on American account holders through their own governments rather than directly to US tax authorities.
The European Commission in a statement welcomed the new approach, which it said would "greatly reduce" compliance costs and legal difficulties for European financial institutions.
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By GlobalDataAs clamor for international consensus on information exchange getting louder, WealthInsight is of the opinion that this agreement could well be the basis for all of the future ‘anti bank-secrecy treaties’.
The US Congress estimated that Fatca would raise up to US$1 billion a year for 10 years after implementation.
However, absence of major international banking nations such as Canada, Switzerland and the Netherlands and tax haven jurisdictions such as Ireland, the Cayman Islands and Bermuda, could raise questions over the effectiveness of this treaty.
Concerns are also raised over the potential negative impact the deal could have over the US economy and its reputation as an attractive destination to do business. Many market watchers believe that the new deal could make Americans less attractive as clients for financial institutions, raising their cost of doing business overseas.
Few analysts also warned that that the implementation of rules could also force foreign banks to reduce their investments in the US to minimize their exposure to US tax penalties.
